PART 1

Diamond Brands manufactures rice, wheat, and oat cereals. Sanders Company has approached Diamond Brands with a proposal to sell the company the rice cereals at a price of $22,000 for 20,000 pounds. The following costs are associated with production of 20,000 pounds of rice cereal:

Direct material $13,000

Direct labor 5,000

Manufacturing overhead7,000

Total $25,000

The manufacturing overhead consists of $2,000 of variable costs with the balance being allocated to fixed costs. What is the amount of avoidable costs if Diamond Brands buys rather than makes the rice cereal?

A. $25,000

B. $22,000

C. $23,000

D. $20,000

PART 2

Diamond Brands manufactures rice, wheat, and oat cereals. Sanders Company has approached Diamond Brands with a proposal to sell the company the rice cereals at a price of $22,000 for 20,000 pounds. The following costs are associated with production of 20,000 pounds of rice cereal:

Direct material $13,000

Direct labor 5,000

Manufacturing overhead7,000

Total $25,000

The manufacturing overhead consists of $2,000 of variable costs with the balance being allocated to fixed costs, which are 30% unavoidable. What is the incremental cost per pound that Diamond will (incur) or save if it buys the rice cereal from Sanders?

A.$1.175 savings

B.$0.10 cost

C. $0.075 savings

D.$23.50 cost

PART 3

Diamond Brands manufactures rice, wheat, and oat cereals. Sanders Company has approached Diamond Brands with a proposal to sell the company the rice cereals at a price of $22,000 for 20,000 pounds. The following costs are associated with production of 20,000 pounds of rice cereal:

Direct material $13,000

Direct labor 5,000

Manufacturing overhead7,000

Total $25,000

The manufacturing overhead consists of $2,000 of variable costs with the balance being allocated fixed costs. Should Diamond Brands make or buy the rice cereal?

A. Buy them to save $4,000.

B. Continue to make them because the incremental cost of buying is $2,000.

C. Buy them to save $2,000.

D. Continue to make them because the incremental cost of buying is $22,000.